Carefully consider all the pros and cons of fixed-term contracts

By Tony Poland, LegalMatters Staff • Fixed-term contracts may seem a logical choice when hiring workers for a specified period but employers need to consider all the legal ramifications to avoid running afoul of the law, says Toronto employment lawyer Ellen Low.

Low, principal of Ellen Low & Co., says a fixed-term contract is an agreement between the employer and employee that covers a specific period or project.

Unlike an indefinite or permanent employment contract, a fixed term has a predetermined end date, she says.

“As an example, summer is coming up and people are hiring seasonal workers and they may be thinking they should offer a fixed-term contract,” Low tells LegalMattersCanada.ca. “These agreements can work, but employers must be aware that they can present a high degree of risk. Ideally, employers should seek advice from someone with competence in the area to ensure they are covering every contingency.”

Expires after a definite term or completion of a task

The main advantage of a fix-term agreement for employers is that it expires after a definite term or the completion of a task so the employee is not entitled to termination or severance pay, she says. For the employee, it sets out how long they can expect to work and be paid, Low says.

“The concept is the employee has notice of the termination at the outset,” she says. “The employee then completes the contract and is not considered dismissed or terminated in the usual sense.”

However, Low says where it gets tricky is if the working relationship breaks down.

“Termination of a fixed term contract before the end date typically results in the employee being paid out for the duration of the agreement,” she says. “So, if it is a six-month contract and the employer decides to end it after a month, under common law they would be expected to honour the remaining five months of the agreement.”

Low says the Ontario Court of Appeal (ONCA) decision in Kopyl v. Losani Homes illustrates the complexities of fixed-term agreements.

“In this case, the employment contract included a clause that covered termination for cause and a clause dealing with termination without cause. Among the issues was if those clauses were supplanted or replaced, could they be upheld because it was otherwise a fixed-term contract,” she says. “The employee successfully argued that the termination provisions were legally invalid and unenforceable because, among other things, they violated requirements under the Employment Standards Act, 2000 (ESA).”

Hired on a one-year fixed-term contract

According to the judgment, Kim Kopyl was hired on a one-year fixed-term contract at an annual salary of $150,000 but dismissed six months later and paid four weeks’ salary totalling $11,538.46. She sued, claiming she was entitled to be paid for the entire term of the agreement.

In its argument to the court, the employer did not dispute that the termination clauses contravened requirements in the ESA but argued that the fixed-term aspect of the agreement should also be struck down since it could be considered a termination clause as well.

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However, in upholding a lower court ruling, the ONCA stated that even when an employment contract contains an invalid termination clause, a fixed-term clause still can remain enforceable requiring the employer to pay out the remainder of the agreement.

Low says it is not only employers who have to worry about the consequences of ending an employment relationship before the end of a fixed-term agreement.

“There are instances where you could have a claim for wrongful resignation at common law if a departing employee does not provide reasonable notice of their intention to leave before the end of the contract,” she says. “If an employer hires someone for a 12-month term and that person leaves in the middle, the company could be left high and dry. They may be in the middle of an important project and be forced to hire a replacement.

‘There are cases where the employer has sued’

“It doesn’t happen very often but there are cases where the employer has sued to recoup some of their damages.”

Another risk of a fixed-term contract can occur at the conclusion of the agreement, says Low.

“What happens fairly regularly is that there is an administrative oversight,” she says. “If the employment relationship continues beyond the end of the fixed term and there is no clear agreement between the parties about new terms or a new contract, the employment contract by default becomes an indefinite term contract.

“For instance, if a six-month contract rolls over and is not addressed, it doesn’t matter if the employee continues working for even one day,” Low explains. “As long as that person continues in their employment, there is a chance it can now be seen as an indefinite term contract, which allows for termination at common law, which means reasonable notice of termination or pay in lieu.”

Of course, each case is “extremely facts-dependent,” she adds.

“Still, employers who are of the view that they want to use a series of fix-term contracts may inadvertently be exposing themselves to liability by creating an indefinite term employment relationship,” says Low.

While fixed-term contracts may be beneficial in some circumstances, an employer needs to consider all the possible outcomes, she says.

Parent on leave has flexibility

“Many people believe covering a maternity leave is a great opportunity to use a fixed-term contract,” says Low. “The challenge, of course, is that the parent on leave has some flexibility with respect to whether they wish to extend that leave or truncate it.

“That can create a situation for an employer who has committed to a mat leave replacement for a 12-month term and then finds that the parent who is off is exercising their ESA rights to return early,” she adds. “Now that employer effectively has one employee who has the right to resume her old position and an existing incumbent who may still have several months left on their contract. Without a validly constructed early termination provision, the employer may be stuck paying two people.”

Low says while she doesn’t oppose fixed-term contracts, she advises employers to do their homework.

“If someone has a legitimate reason for doing a fixed-term contract, I suggest including an early termination provision within the agreement that is validly constructed and compliant with the ESA,” she says. “This allows the parties to either resign or be provided with reasonable notice of an early end of the contract.  Absent that language, the default is that the employee will get the balance of the full term.

“In light of the cases coming out of the courts I tell people to give serious thought to why you want a fixed-term contract,” says Low. “And if you do, ensure that you are getting good advice.”